Indexed Life Insurance

What Does Indexed Life Insurance Mean?

An indexed life insurance policy is a life insurance policy with a cash accumulation component linked to the performance of various indexes. The policyholder selects the index to which they want to tie their cash accumulation component (for example, the S&P 500). The most widely sold version of this product in the U.S. is indexed universal life insurance, often abbreviated as IUL.

Insuranceopedia Explains Indexed Life Insurance

For policyholders with indexed life insurance, a portion of the premium goes toward the death benefit, while the remaining portion is added to the cash accumulation component. The interest rate applied to this cash accumulation component is determined by the performance of the index linked to the policy. For example, if the index rises by 5 percent, a 5 percent interest rate may be credited to the policy. Buyers comparing indexed policies often look at them alongside other types of life insurance that build cash value, including whole life and standard universal life.

A significant advantage of these policies is that, if the stock market declines and the index drops, the policy simply accrues no interest during this period, rather than losing value. This approach is generally preferable to having funds deducted in response to a negative index movement. Like other forms of permanent life insurance, indexed policies are intended to stay in force for the insured’s lifetime, provided premiums are paid.